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Lawmakers Zero In On AM/FM Royalties

November 28, 2012

Performance royalties for terrestrial radio aren't even part of the Internet Radio Fairness Act, but that didn't stop lawmakers from repeatedly raising the issue at Wednesday's hearing on the bill by the House Judiciary Committee's Subcommittee on Intellectual Property, Competition, and the Internet.

The focus on AM/FM started early, as subcommittee Ranking Member Mel Watt (D-NC), said in his opening remarks that the exemption for terrestrial radio is "about 90 percent of the problem" with regard to music royalties. Judiciary Committee Ranking Member John Conyers Jr. (D-MI) also pressed the issue, after criticizing the IRFA for potentially reducing Internet performance royalties by as much as 85 percent and calling it the "Paycheck Reduction Act."

Before testimony even began, Conyers expressed a lack of sympathy for Pandora, whose CEO, Joe Kennedy, was set to testify. He didn't mention Pandora by name, but said, "Here we have the leading supporter of this bill, a publicly traded company valued at $1.4 billion at the end of last month, essentially urging that we consider a measure that would cut royalties and deprive artists of the fair market value of their work." He went on to say the debate over the bill "may well be the catalyst" for a performance royalty for AM/FM radio, saying, "Outside of the experts here, most people assume, listening to a song or performance on the radio, that [artists] were getting some kind of compensation all the time."

Kennedy was the first witness after the lawmakers' opening statements (in the interest of time, all the witnesses' prepared testimony was entered into the record, and each was asked to summarize the testimony during the hearing). Pandora is part of the Internet Radio Fairness Coalition supporting the IRFA, and Kennedy began, "Americans' embrace of Pandora reflects the potential of Internet radio." He said the "willing buyer, willing seller" standard created in the 1998 Digital Millennium Copyright Act and used by copyright royalty judges in setting performance royalties for Internet radio creates an "unfair process" in which judges are prevented from reviewing all the relevant evidence.

Kennedy noted that Pandora will account for only 7 percent of U.S. radio listening this year, but will pay SoundExchange more than half its revenue. He said, "Pandora pays more in absolute dollars than any other company, including SiriusXM, a company with eight times our revenue."

SiriusXM pays its royalties under a different, market-based standard; one of the goals of the IRFA is to put Internet radio under that same "801(b)" standard. Kennedy said the "willing buyer, willing seller" standard has been ineffective because there is no "market" for radio rates, adding that the recording industry "has actively sought to prevent any such market from developing."

Rep. Howard Coble (R-NC) later asked Kennedy if Pandora could be "profitable and successful without changes in the law" and asked how it generates revenue. Kennedy responded, "I don't think this issue is really about the profitability of Pandora," but added that if that is relevant, 801(b) would be the proper rate-setting standard, because it takes the financial performance of companies involved into account, while the current standard does not.

Hubbard Radio CEO Bruce Reese, a former NAB Joint Board chairman, testified on behalf of NAB members, saying that many broadcast stations still choose not to stream their music programming because they find the royalties unaffordable, and, no matter how much listening grows, "the cost curve never bends in a favorable direction."

He said Hubbard streams because listeners expect it, but has never done better than break even; Reese said, "The majority of broadcast radio stations and the local services they provide remain out of the reach of Internet listeners." He noted that the NAB doesn't support any particular legislation, but said NAB members' biggest concern is the unpredictability of the current rate-setting process for Internet performance royalties. Reese said reforms "must not be bogged down by past fights over controversial performance rights bills."

Asked later in the hearing how terrestrial radio differs from satellite, cable, and Internet radio, Reese noted that AM/FM radio is "local and free." He noted radio has been in place for 90 years and has played a "multi-billion-dollar promotional role in the music industry." SoundExchange President Michael Huppe, testifying against the IRFA, had earlier said music "makes radio possible," to which Reese responded, "Radio makes music possible." He said, "We believe the free, local nature of our business is very important in continuing to make music popular."

Huppe had earlier begun his testimony by bluntly stating, "The music industry stands united in its opposition to the Internet Radio Fairness Act," and complaining that the bill "blatantly ignores" the fact that AM/FM radio pays no performance royalties. He said Internet radio is "flourishing," and added, "SoundExchange wants to foster that growth, which is good for everybody."

Huppe said the statutory license has been a "tremendous gift" to Internet radio and that "the very least Congress can do is make sure artists are paid fairly for this transfer of rights." After pointing out that Pandora would pay only $4 if a listener streamed Pandora 20 hours a month for a year, Huppe noted, "That is less than some people here paid for their coffee this morning."

He also said SiriusXM, MusicChoice, and Muzak are the only digital music services not operating under the Digital Millennium Copyright Act's rate-setting standard simply because they existed before the bill was passed: "They're getting this break because they've been around a while." Huppe added, "We cannot have a discussion of fairness if the $14 billion radio industry pays nothing."

Recording artist and producer Jimmy Jam, also testifying in opposition to the bill, compared an artist's payment for a song purchased on Amazon -- about 70 cents -- to payment for a song streamed on Pandora, about 1/10 of a cent. He also pointed to terrestrial radio's exemption, saying, "One business in America is allowed to take and use another's intellectual property without permission or compensation."

Conyers focused again on terrestrial radio during the Q&A with witnesses, "I'm still trying to determine why artists and performers whose music is played 24 hours a day on terrestrial radio don't get a dime," he said, calling the situation "unacceptable." He asked Jimmy Jam if it's time for performers to get "some share of all the enjoyment they're giving to hundreds of millions of people," to which Jam responded, "This is an area where it doesn't really make a whole lot of sense, that artists do not get paid royalties on AM/FM radio." Jam did say artists "like the idea" of private arrangements such as that reached by Clear Channel and Big Machine Records because they are "an acknowledgement that it is a fair thing to do," but still insisted that only Congress can create an industry-wide solution.

Rep. Howard Berman (D-CA) spoke up to call Reese "disingenuous" to talk about "finding the rate that will incentivize more webcasting without acknowledging any obligation for a performance right for over-the-air broadcasters." Berman added, "If radio stations want to be all Talk radio, they shouldn't have to pay a penny for music performance rights."

(11/30/2012 1:26:00 AM) Can any of these legislators get their head around the business model for radio? Their comments make them seem out of touch and unable to grasp simple economics. Performance royalties are fine but performers receive promotional value and historically were partners with advertisers and radio folks in providing the mechanism for free emergency alerts, news, sports. If they pull out, and we know advertisers are pulling out - how does radio continue to provide all this for free?

- Ellie

(11/29/2012 8:32:08 AM) I have no problem paying the artists performance royalties. So where do I send our rate card so I can be paid for my air time. I guess I can ask the record label reps when they call our station asking us to play this artist or that artist.